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How to Avoid Tax Consequences While Leaving Behind An IRA

It may have been in the best of intentions that you decided to leave an IRA behind to a loved one but this can generate unintended tax problems for the beneficiary. Naming a trust as a beneficiary of your IRA instead can help to protect heirs who are disabled, vulnerable to creditors or who are minors.

Failing to appropriately structure your trust, however, could accelerate IRA liquidation, which could cause significant problems for taxable distribution. Trusts only need to have $12,750 in 2019 to be subject to the top tax rate of 37%.

When it comes to naming a beneficiary for your retirement account, it’s well worth scheduling a consultation with an estate planning lawyer. By using a trust as your IRA beneficiary, this still enables you as the owner to have some element of control. However, not every IRA custodian will enable you to list the trust on your beneficiary form. Furthermore, this can be complicated by the tax code. There are specific conditions for trusts that are serving as beneficiaries for retirement accounts. Failure to follow through on these rules properly could lead to an accelerated distribution of the IRA assets and significant taxes.

This is why it is recommended that you partner directly with an experienced estate planning lawyer who is very familiar with establishing a trust as the beneficiary of an IRA to avoid consequences to protect your underlying goal of passing on assets to your loved ones.